Citigroup Inc. (C) Q4 2006 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to Citigroup's fourth quarter and full year 2006 earnings review, featuring Citigroup Chairman and CEO Chuck Prince and CFO Sallie Krawcheck. Today's call will be hosted by Art Tildesley, Director of Investor Relations. (Operator Instructions) Mr. Tildesley, you may begin. Art Tildesley : Thank you, operator and thank you all for joining us today for our fourth quarter 2006 earnings presentation. We are going to be walking through a presentation that is available on our website so if you haven't downloaded that, please do so now. We are going to follow our usual format: Chuck will start with some comments on the quarter and then Sallie will take you through the presentation and then we would be happy to answer any questions you may have at the end. Before we get started, I'd like to remind you that today's presentation may contain forward-looking statements. Citigroup's financial results may differ materially from these statements, so please refer to our SEC filings for a description of the factors that could cause our actual results to differ from expectations. With that said, let me hand it over to Chuck. Chuck Prince: Art, thank you very much. Good morning everybody and thank you for joining us. As Art said, as usual I will provide an overview and then turn it over to Sallie for the detail; and then we will both be happy to answer any of your questions. Overall, I would say we had a good solid quarter in the fourth quarter of 2006. As you know, we are engaged in a very extensive, very transparent multi-year effort to rebuild Citigroup: to open branches, to build deposits, to rebuild and connect old -- sometimes very old -- technology systems, and to reweight the company to a much more international earnings mix; and to do all of that while generating good short-term results. It's not easy, it's not fast, it is certainly not glamorous. But this quarter was a good solid chapter in that book with good progress on all fronts. As I go through my analysis of this I am going to very candidly tell you what I think worked well and what didn't work well, as I try to do every quarter. So let's get started. Overall earnings of $1.03 and of course, that is after absorbing the $0.08 charge for Japan. There were other pluses and minuses, but they were basically about equivalent. Revenues were up 15% to a record level of nearly $24 billion. As you know, revenue growth has been somewhat of an issue for us over the last few years and we've worked very hard on this, so this level of revenue growth felt very good. It is based on strong customer volumes. On a global basis we had deposits up 20%, we had loans up 16%, client assets under fee-based management were up 15% and these are the kind of numbers that do drive good revenue growth and that we look for going forward. Expenses were up 23% and obviously as I said at Citigroup Day, the relationship in this case between 15% revenue and 23% expenses is not a good relationship. I'm not making any excuses, but if you do take out the one-timers in the fourth quarter of '05 and the 123 R accounting charges for '06, then you get pretty close to revenue growth. But that is not satisfactory. Bob Druskin's new job is off to a very good start, he is examining the structural basis of our expenses for Citigroup. As I said in mid-December, he will be done with that by the end of this first quarter of 2007. Now what worked well? Well pretty obviously alternative investments worked well, in the same way it didn't work very well in the third quarter. I said then that one needed to take a longer perspective on this business. I say it again now. This is a business which has to be looked at over much longer cycles than 90 days. Overall, it’s doing very well especially in this 90-day period. I also want to note the connectivity between alternative investments and our corporate investment banking business. Some companies report these two units together and as a result have different dynamics to their businesses. We don't do that. But these businesses are working much more closely together and the results show. What else worked well? Wealth Management worked well, the continued shift to a more advisory-based strategy helped drive record revenue growth up 21%. Our corporate investment bank, I would say worked well “but”. The worked well part was revenue growth was good, reported growth of 14% without the one-timer for the Nikko share gains in the fourth quarter of '05, the underlying business revenue growth up 21%, the margins continued very strong. We did particularly well in the international area, we did particularly well on a competitive basis in GTS, Ellen Alemany and her team really knocked the cover off the ball on a competitive basis. And of course the broad rankings for the full year reflect very good customer activity. So what is the “but” part of the “works well, but”? The “but” part is that many of our competitors reported even higher revenue growth. Now much of that is in areas where historically five, ten years ago we missed investing in new growth areas and we are playing catch-up; commodities is an example. But it's also true that in this business the competitive results are very transparent. You trade better than the other person or you don't. You win the particular deal or the other person gets it; it is very transparent. All of us, especially our new management team at CIB are motivated not just by protecting our number one rankings, our long-term high rankings, but by beating the competition. We need to do that on a stronger, more consistent basis. Now let me shift to the consumer business. In December I said about the U.S. consumer business that I was cautiously optimistic. The results that you see on pages 4 and 5 of the deck I think show why I feel that way. Most things are working well, most of the trend lines are positive against flat expenses. One thing not working well is still our Sears portfolio, which is still a real drag on the overall growth of our cards receivables. But most all of the other trend lines are favorable. Sallie is going to talk later about our progress on net interest margin. So this has been an enormous focus for us over the last perhaps 18, 20 months, as you know, I've talked about it a lot. The trends do look good, but I am going to still keep the word cautious in front of optimistic for a few more quarters. International consumer. International consumer had a tough quarter, there is just no other way to put it. Any business that has reported revenue growth of 2%, reported expense growth of 24% and net income down 43% -- especially a business we are trying to build -- has got a lot of explaining to do. This is a perfect example of the importance of digging under the reported numbers. The reported numbers I just cited were not good, and don't get me wrong: the reported numbers are what counts, that's what we deliver to the stockholders. But if one doesn't dig down to understand the underlying dynamics, one could end up making bad decisions based just on reported numbers. So what are the underlying dynamics in international consumer in this tough quarter? There were three big issues this quarter: the first is the Japan gray zone charge. We talked about that previously, but it took reported revenue by itself, took reported revenue down from a plus 15% level to a plus 2% level. The second was credit and especially in the Mexican credit card business. This is detailed on the top right of page 8. You'll see that the NCLs have grown in a marked way in this business and this reflects our expansion into different market segments. Profitable market segments that we previously discussed with you, but ones that have different credit dynamics than the businesses we had been in, in the Mexico cards business. Now we believe that this level of NCL reflects the maturation of our credit experience in this market expansion and even at these levels, the net income from this expansion is still very good; a good expansion effort for the stockholders of the company. But if you isolate this one line, the credit, it does show this and something that we believe is matured but that we are watching very carefully. The third area is expense growth, and this reflects the heavy build out we had in 2006; all the branches in the international space. Obviously there is a drag from the long-term effects of the expenses compared to the short-term growth in revenues. You build the branches and it takes a while, measured in months, for the revenues to start and then to build up in a way where it overcomes the drag of the opening of the branches. This quarter, the fourth quarter of 2006, is the bottom of that relationship; that is the relationship between the cumulative effect of the drag of opening new branches versus the gradual effect of the buildup of revenues from those branches. So as I look forward into 2007, because the investments that we have made are all on track as far as revenue is concerned and because we are moderating the heavy level of investments we did in 2006, as I said on Citigroup Day in light of our expectations on credit headwinds in '07, because of those two factors I expect a much better relationship between revenues and expenses in the international consumer business into and through 2007. Now let me turn to credit for a moment. This is detailed on pages 8 and 15 of your deck. With the exception of the Japan gray zone and the Mexico cards business which I have already discussed, I would say that the overall credit environment is generally stable. We are looking at this very carefully and we do see some slight weakness in autos and second mortgages, but the word slight is the way we would characterize it at this point. Sallie is going to go through this with you in detail so I won't repeat that. But I would emphasize as I did at Citigroup Day that we are planning on headwinds from credit in 2007. And we are managing our business in light of that. Now just a couple more points before I finish and turn it over to Sallie. One of those couple finishing points is on deals. The fourth quarter was a good quarter for us on deals. We led the consortium that bought 85% of Guangdong Development Bank, we bought all of two banks in Latin America, Grupo Uno and Grupo Cuscatlan, we bought the Quilter Wealth Management business in the UK and we bought a strategic stake in Akbank, the leading private bank in Turkey. That is a very, very healthy level of activity for one quarter and one where I think we are acting in a very consistent way in how we are moving to extend the franchise through transactions. A very quick overall thought about 2006. We have said for a long time that our long-term financial goals are threefold: As I look back at overall 2006, we had revenue growth of 7%, so we were right where we wanted to be there. Our net income growth from continuing operations was 7% as well. So it was not higher than our revenue growth, so that wasn't as good as we hoped for, although I would note that EPS from continuing ops grew 11%. We did return $17 billion to the stockholders, $7 billion through buybacks and almost $10 billion through dividends and our return on equity was 18.8%. So we didn't get there the way we wanted to or planned for at the beginning of 2006. As I said, the revenue growth was short of what we wanted and we ended up relying more than we wanted to on the benefits of improving credit. But the bottom line is the bottom line. What we delivered to the stockholders for 2006 was generally consistent with our long-term financial goals. We ended up with total stockholder return, price appreciation plus dividends, for 2006 of nearly 20%, 19.6%. Now I recognize that part of that came from the stock price depreciation at the very end of the year. I will tell you it is no fun to score in the last two minutes of the game. It is better than not scoring, but it is nerve racking to score only in the last two minutes of the game and our goal for 2007 is to be ahead quarter by quarter and not have to score in the last two minutes. Lastly, the increase in the dividend. This was our 22nd year in a row of increasing dividends. We all know that increasing dividends is a permanent allocation of capital in our business. Having the flexibility to allocate capital is what is the big positive, not permanently allocating it. So that tends to make you want to think of lesser rather than greater increases in dividends. But I believe that a double-digit increase in dividend was appropriate here because of my belief in the strength of our opportunities for growth both into 2007 -- very short term -- and over the longer-term beyond that. So I will end where I began, we are engaged in an extensive long-term rebuilding effort, one that will generate very sustained growth on a long-term basis and at the same time, we need to deliver good short-term financial results. I believe the fourth quarter of '06 was a good solid quarter for us in that effort. So, Sallie, let me turn it over to you and ask you to go through the detailed deck please. Sallie Krawcheck: Thank you, Chuck and good morning to everybody. Thank you all for joining us. I'm going to go through the deck which is as Art said is on the website so you can find it there. Let's go ahead and start with Page 1 where we have a summary of the quarter for you, much of which Chuck has already touched upon. Revenues for the quarter a record, up 15% at $23.8 billion. Net income from continuing operations $5.1 billion, up 3%; earnings per share of $1.03, up 5%, and a return on common equity of 17.2%. The businesses I will go through in a bit more detail, but you will see here some of the highlight bullets. The consumer businesses, good progress in the quarter and good customer engagement. In the corporate investment bank, as Chuck said, a solid quarter with nice revenue growth and as we've been seeing for some time, particular strength in our international businesses. Global Wealth Management a record revenue quarter this quarter, driven by higher fee-based revenues and improved asset flows. COI record results this quarter, quite a bit above our expectations as we had some good private equity gains and hedge fund performance. Net interest margins, down for the quarter with the gray zone impact which impacted net interest income and net interest margin but flat sequentially excluding that. Consumer credit generally stable globally; we do have some country-specific issues internationally either because of industry-wide types of issues in countries that we've talked you about before -- Japan or Taiwan -- or as our portfolio seasons from the growth we've seen over the past couple of years, such as Chuck had mentioned in Mexico cards. In the quarter we took a hit to earnings previously announced from the Japan consumer finance charge with the impact from gray zone being 489 after tax, that is different from the charge number that Chuck referred to because there was a bit of credit there as well and when you add all of those together, this was the impact of gray zone on us for the quarter. We also had a previously disclosed gain on our sale of Avantel in Mexico which was $145 million to the good; and the FAS 123 R really roughly netted us out of $173 million after tax. The capital management opened a record number of branches again this quarter so a record number of branches for the year, for a growth rate of 18% more branches at the end of the year than we had at the beginning of the year. As Chuck also mentioned we had five M&A transactions kept the team very busy there in the quarter. We bought back $1 billion worth of stock in the quarter, $7 billion for the full year. Again as Chuck mentioned, paid out $9.8 billion in dividends and this morning announced a 10% increase in the dividend per share. Page 2, the income statement. As we work our way down what you see is 4% increase in net interest revenue in the quarter which is an improvement over what we've been showing here for some period of time. Other revenue this quarter rebounds back to the double-digit growth rate that we've seen in prior quarters that have 24% and all of that gets us to 15% net revenue growth rate, even with the grey zone charge and some of the other issues. Operating expenses up 23%, I'm not going to spend time on this now. I've got a chart further in the back and I will get to that breakdown of where the operating expense increases and the revenue increases are coming from so we can show you what underlies that. Credit has been, of course, as you know a big benefit for us for the year and for the industry for the year. But in the quarter it's a bit of a headwind for us with better credit in the U.S. being offset by a bit of a credit headwind overseas, and I will go into that a little bit as well. This brings us to income from continuing ops of $5.129 billion, up 3% with 2 points of leverage from the share buyback to get us to 5% continuing operations per share growth. The number for that for the year is 11%. Revenue growth, double-digit in both the United States and overseas and 4% for the U.S. for the full year and 14% overseas. Onto Page 3 where we breakdown revenue growth a little bit more. I'm going to do something here that I typically don't do -- Chuck did a little bit of it before -- which is to refer to some of these revenues, and later on earnings, ex some of the one-time items that we had last year. First of all, I'm going to promise you that every time I do this reference the numbers won't be better. Secondly I, like Chuck, understand that what you all get are actually reported results, not the results of certain things that did or did not magically happen, good or bad. The reason I'm going to do this is because you are going to recall in the fourth quarter of last year we had what was essentially a dog's breakfast of one-time items both good and bad, although they roughly netted themselves out. So the underlying numbers I will talk about here, they did change some of the underlying business numbers and so the numbers I am going to talk about here are going to reflect our view of what is the underlying health of the business and how we as a management team think about how these businesses are doing. The alternative investments business and global wealth management of course excellent revenue results this quarter. The corporate investment bank up 14% even when battling what you may recall was last year's gain on the share of some of the Nikko sales which was a revenue headwind for us this year. Consumer up 9%, 14% in the U.S., although I would call that about 4% underlying growth for the U.S. consumer business. We had the impact of the rewards write-off last year and this 4% compares to a negative growth rate in revenues in the first quarter and 1% in each of the second and third quarters. If you look over on the right-hand side by region, you're going to see the story really remains the same as it has been all year, with very good revenue growth by region. The U.S. even posting somewhat better revenue growth and Japan really being the exception, again the gray zone issue. Page 4, taking a minute on U.S. consumer. You're going to see if you look down to the loans and deposits, up 10% and 16% respectively, very good customer engagement and volume growth. We have 14% reported revenue growth. Within that, cards up 31% but the underlying number there is really mid single-digit rate on a couple of percentage points of receivables growth for the business. In retail distribution, deposits are up 19%, the revenue growth is lower due to the strength of the esavings initiative -- which has passed $10 billion in deposits -- and the mix shift that that implies. Also what we are seeing in retail distribution is you're going to see the revenue growth at Citi Financial is reviving which is very nice to see. On the expenses, expense up 4%, expense growth is moderate in this business while credit was a tailwind again for the business in this quarter and during the year. Page 5 is the U.S. consumer trends, and this really shows you a continuation of the trends we've been showing you for the past couple of quarters in U.S. consumer. We like what we see, we continue to like what we see sequentially which is now after a period of time beginning to translate into some year-over-year growth as well. Page 6 international consumer, we had a few one-time items last year and of course we had some this year which impacted revenues. When you clear all of those away what you'll see is that you do have business momentum of double-digit revenue growth in the business on the back of the investments we've been making. As Chuck mentioned expense growth here is high in relation to the revenues, 24%, about one-third of this expense growth is due to the investments. As Chuck also mentioned, this quarter marks the greatest pressure to expenses from those investments and to the international consumer's bottom line from the incremental investment spending. In credit, the biggest driver of the increase in credit was a reserve build in Mexico cards to reflect the growth of that portfolio and the seasoning of the portfolio and the details will be a bit later on that. Page 7, customer activity in international consumer looks very good across the metrics. Page 8, the Corporate Investment Bank, revenues up 14%. We had the Nikko Cordial share sales last year so 21% with that. Good results on revenues across fixed income, equities, investment banking as well as the consistently excellent performance in our Global Transaction Services business. Expense growth was impacted here, as it has been all year, by 123 R and was impacted here as well by the large legal reserve release we had in the fourth quarter of last year. Credit overall for this business was stable and that is true really around the world, it was pretty stable globally for the corporate business. Page 9, global wealth management, we continue to benefit from the transition to a more fee-based wealth management business with total revenues up 21% and fee-based revenues up by almost one-third. Alternative investments and corporate other on Page 10. Terrific results in alternative investments and it really was across the portfolio, it wasn't a big gain in one area or very good performance or outstanding performance in one product. It really was the business in good shape really across the products. On corporate other, the number here, the negative 196 is somewhat below the average result that we've had in this line in the past several quarters. Treasury was better and decline, versus the past if you average the past several quarters, is due to a higher level of taxes held at the corporate level this quarter. Page 11, let me turn to credit, I have a couple of slides on this. What you see on the top left-hand side is a picture, a trend line of U.S. consumer credit and we've given you a bit more history than we typically do here so you can see some of the longer-term trends. What you see is we had a slight pickup in credit on the NCL side which is the darker blue line. Some part of that is seasonality that we see. The credit experience across the portfolio looked at broadly, really remains in quite good shape. On the international side, which is the bottom left-hand side, we've got flat delinquencies in international with some uptick in net credit losses on the impact of gray zone with our portfolio sale and the seasoning also of the businesses. In the corporate and investment bank, while we had a credit cost this year as opposed to what had been the unusual credit benefits a year ago, the results really remain very good across the region. Page 12 on consumer credit, we thought we'd give you a little bit of a closer look and a bit more detail. Firstly as many of you are aware, we announced a couple weeks ago that we took a reserve build of $375 million after-tax and a repositioning charge of $40 million after-tax in our Japan consumer finance business. This was to reflect the change in laws in the operating environment regarding the gray zone. In addition to that, we saw current period settlements of $55 million after-tax and net credit losses of $19 million after-tax. The net is a bottom line impact to us in the fourth quarter versus the prior year period of $0.10 per share. There is, of course, uncertainty on the business as we move into '07 but we look for it to breakeven for the year before returning to profitability thereafter. The second topic is Mexico cards which is the largest single driver of increased international consumer credit costs. As we build the LLR, the loan loss reserve, in this portfolio, about $110 million to cover future credit as the portfolio continues to season, the credit performance in the portfolio is within our plans and as you can see from the chart here where we have the blue line is the 30 days past due. The 30 days past due, while there is volatility in those numbers does appear to be behaving. As for credit elsewhere which is on the bottom, in the U.S. we have a broadly stable credit; we see some slight weakness as the industry in autos and second mortgages, though the results are still very good portfolio by portfolio. In Mexico, mentioned that already. EMEA, the uptick in the NCLs due to portfolio growth and as mentioned, a portfolio sale. Asia we saw stabilization there. This is a topic we've been talking to you about for the past couple of quarters as the industry underwent a credit issue, I guess in the cards business and where we felt the impact of it had significant outperformance versus the industry. You can see here that Taiwan is improving and so the credit in that region of the world is stabilizing. Latin America the credit has ticked up a bit as we brought Credicard into the family and that has a higher credit rate, although very profitable. We see portfolio growth in Brazil, again in line with one would expect as a result of portfolio growth. So all in all still a very good credit performance for the company during the quarter. Page 13, net interest margin. As mentioned, net interest margin in the quarter is down sequentially due to the gray zone charge but flat over the third quarter ex-gray zone, holding at 262 basis points. Page 14, next topic that we get to is to breakout for you the components of revenue and expense growth. Now each quarter we try to break these out for you so you can see the major drivers of what is growing revenues and growing expenses. If you look at revenue you can see that the investments had a 3%, 3 point, impact on revenue growth for us in the quarter. 11% what we consider to be BAU and I also broke out here for you as well the press release disclosed items. As mentioned there were a lot of them last year, but they tend to pretty closely net out, not business by business within Citigroup but pretty closely net out for the company overall. Now when you get to the expense growth, which is 23% in the quarter, I am going to start at the bottom here -- I apologize for doing that. But the big item to note is the 5 percentage point headwind that the company faced from the as we call press release disclosed items, which is really a euphemism for the big legal reserve release that we had last year, $600 million. So that was really a big headwind for us and was a good part of 5 points of the 23% increase in expenses. The investments you will see here 4 points of expense increase from the investments, that compares to 3 points on the revenue side, so negative 1 point of operating leverage from that. We had a little bit of a different impact for FX on the revenue side versus the expense side. But all in all, when you boil it down the underlying expense base for the company as we talk about and talked to you in the past about it on a BAU basis, is let's call it 9%. So as Chuck said not terrific, and I know there is sticker shock when one sees the first number of the expense growth of 23%. But the operating leverage has gotten better on an underlying basis during the course of the year, and of course we have a lot more work to do in the business. I can tell you, we are all very engaged in this undertaking. Page 15 then, in terms of the 4 points of expense growth in the investments that I referred to on the prior page, we breakout the components for you here on page 15. International consumer and CIB -- we hope don't surprise you -- continue to represent the largest allocations of our spending with 288 branches opened overseas this quarter. Page 16 talks about capital. As Chuck already mentioned, share repurchases of $7 billion this year, $9.8 billion of dividends returned to the shareholders. The ratios remained strong for us at the end of the year and we of course increased the dividend today by 10%. Finally, the last page of the presentation we get to the financial expectations which should be familiar to many of you all by now, so I won't go through each and every one of them by any means. What I would like to do is to take you down to the bottom to talk about 2007 considerations, most of which Chuck mentioned at our investor day back in December. Things that we take into account as we did our budget and you should take into account too when you think about Citi, is that in terms of the yield curve we look for it in our budget to remain slightly inverted through the course of the year. We obviously will change our positioning during the year if we think things are going to be different. But the task we've given to the business heads is to assume that the yield curve remains slightly inverted. On credit, we budgeted as we told you before for a turn in credit this year so another headwind for us to overcome. A final headwind is that we did have, as you know, because we've disclosed it, some one-time tax benefits in 2006 and so therefore not having it in '07 we look for the tax rate, all things being equal, to return to a more normal rate of 30% to 31%, not the 27.3% that we saw in '06. Japan consumer finance, we've talked to you about this before, but we look to breakeven in that business in '07. In the investment spending, as you know, we added a record number of branches and a record amount of distribution in '06 and so we are going to moderate this in '07. I don't have it on the list, but as you know Bob Druskin is leading our business heads in a thorough review of the structural expense base and so we look for good savings for that in '07; I will report back to you, as Chuck had mentioned, at the end of this quarter. So all in all, when you combine these we've given ourselves some good hurdles to clear during the course of '07 in terms of the budget. Everyone is hard at work and we expect to have good things to talk you about on expenses, we expect to have good things to talk to you about on the investments we've been making in '06 as we go into '07. Taking all these things into account, if some of these things that we've laid out here are better than the hurdles we've put up in front of ourselves, all the better. Taking all the factors into account, the hard work that folks are doing, the beginnings of the payoff of the investments, the expense initiative, we look to deliver good bottom line results for all of you in 2007. So with that I think we are ready to take questions. Art Tildesley: Thanks, Sallie. Operator, we are ready to start the question-and-answer part.

(Operator Instructions) Your first question comes from Guy Moszkowski – Merrill Lynch.

Good morning. First question just on U.S. cards, could you characterize for us this quarter the increase in revenue that is alluded to from previously secured type receivables and fees?

Sure. Guy, the story is a bit the same as it was last quarter, which is that we report numbers to you here on a GAAP basis. So we do this quarter, as we did last quarter, have some gains from securitizations that are off the books which are both from a little bit of the pricing and some of the actions we talked you about last quarter which are coming through both within the on-book portfolio as well as the off-book portfolio, as well as continuation of good credit. So the combination of those things, this is not by any means an increase in incremental securitizations gains, but instead really is good performance of our portfolio as well as the portfolio that is off of our balance sheet.

Thanks for that. Can you tell us what your total investment spending ended up being for the year versus what you had forecasted it would be on October 29th? Was it significantly different in any way?

No, it was not significantly different in any way; I'm going to get you the exact number. For the year we spent $1.104 billion in expenses and we had looked for it to be $1.170 billion in expenses.

So it was actually a little bit under?

It was a little bit under, that is correct.

As you cut that back in 2007, as you discussed, where are the biggest cutbacks coming from at this point and where do you expect to roughly maintain?

I think that as I said at Citigroup Day there are several areas where we are achieving the kind of size that we want. Some are the countries where we are opening branches in '06, India is an example of that. In the U.S. we opened a bunch of bank and consumer finance branches in '06. I talked a lot about the tests we had going in the Boston and Philadelphia markets on the connectivity between retail banking and Smith Barney, and I want to see how those tests play out before I push ahead with dramatic branch opening growth here in the U.S. So those are the main areas where I would say we would see less activity this year: the heavy build out in the international; we are going to build out in Boston and Philadelphia this year but outside of those areas we may wait. I think we will wait and see how that plays out. Other areas where we don't have as much a base as we want, Russia is an example, we will continue to build out. But I think you get a sense of how that would be moderated.

In Japan was the net loss for that unit pretty much in line with where you had forecasted a couple weeks ago? Or were some of those settlement cost ultimately higher than you had thought?

No, not at all, Guy. It is what we had projected, I think we gave even a net income loss number in the press release when we put that out, but it is exactly in line with the expectations. In terms of how it is performing it's of course very early to tell how it is going to be.

The scale of the office cutback there indicates either a major distribution model shift or just a massive retrenchment. What do you think that it is at this point?

It is a major distribution model shift, it is basically going to no-person offices rather than having staff branches.

Guy, in some ways it is a continuation, but a very fast continuation, of what the business has been doing. Five years ago there were 905 branches, and so we were bringing those down pretty steadily over time and shifting the distribution to what we call an automated loan machine. What it looks like is a sort of bigger and fancy-looking ATM with a private area were a person can take out the loans and have communications with folks who are off site there. These are better in that it enables you to get a lot of this information to the client that by law we are required to do, so we have real records of what we've done there. They are very clean, they're very nice, but it really is a major shift for us from the manned branches to these automated loan machines.

Okay, great. That is kind of where I was going with the question. Appreciate that, thanks.

Your next question comes from Betsy Graseck – Morgan Stanley.

One, just to follow up on the Japan question. Chuck, I'm sort of thinking about the consumer finance business within Japan on a standalone basis having had a much higher ROE than maybe it is going to have on a go-forward basis. I'm wondering if you think about that business as a standalone unit within your Japan consumer operations, does your thinking change at all given the regulatory changes that you have in that business? Is there a need to maybe broaden out the products as it relates to the consumer generally?

Good question. The short answer is yes, if I understand the tone of your question correctly. We've been looking to expand our Japan business pretty significantly for quite awhile. Obviously, with the private bank issue in Japan in '04, it took us a good year-and-a-half to get to a point where we could legitimately think about expanding our business in Japan. But I've long felt that our consumer business in Japan was way too weighted just in one product area. We have a very good brand over there, we had very good customer service scores. I think our retail bank is rated as the highest ranked foreign bank, and number three or four of all banks in Japan. But it is quite small, and I think we are back to a point now in terms of the regulatory and public perception of the company where we can legitimately think about expanding. Given the size of the wallet in Japan, I think that is a very legitimate thing for us to do. So I would not expect if you were to look forward 12, 24 months, I would not expect that the footprint of Citigroup Consumer Japan would look like it does today or has looked in the past.

Okay. And then on the opportunities for improvement in pre-tax margin, I realize that part of your expectation for that improvement is coming from a slight reduction in investment spend and the benefit from the investment spends that you've made to-date. I guess I'm wondering if you could give us your sense as to, given the broad portfolio of businesses that you have, where you really think you are under earning the most at this stage and over the next year, two years where you think the acceleration would be the greatest?

Well, I'll start that. I'm sure Sallie will have a point of view which will be important there as well. I think that, as I said for a couple of years now, the biggest job we have is to improve the performance of our U.S. consumer business. I'm going to repeat my mantra of cautiously optimistic. We cannot have 40% of the whole company with no real revenue growth dynamic to it. We just aren't a growth company if we can't make U.S. consumer a growth business. That it is why it has been such a high focus and that is why I am very cautiously optimistic about where we are going. It is very much a fixed cost business compared to our others. So we have a big run-up in alternative investments or CIB, the variable costs take a lot of the top line. But in consumer, it is much more fixed cost, more of the revenue growth falls to the bottom line. So for a lot of reasons all the activities that are going on, what Steve and his team are doing, Sally's comments on the way it is playing out and so forth, that is where I think we ought to have an important pickup. I think internationally the investments we've made will pay off in ways which will drive that revenue growth. I think in CIB we expect to see a very strong competitive performance by our team which, considering the margins we have, ought to be very good. About 40% U.S., about 30% international, about 30% CIB, rough numbers of the whole company. Without acquisitions that is how I would see it playing out.

Your next question comes from Mike Mayo – Prudential Equity Group.

Good morning. Since Citigroup Day you said that Japanese consumer finance would only breakeven in '07, so that would be an extra headwind. Any change to the guidance you gave then?

No.

Did you know about that at the time or you just see some offsets to that?

We didn't know enough at that time. I mean the law, as I recall, had passed the day before. We'd obviously been looking at it for a period of time and had a pretty good idea where it was going. But a lot of folks on my staff had their pencils sharpened and their pocket calculators flying right before Citigroup Day and right during it. So we were honing in on what it was going to be. So no, this wasn't a big surprise that came to us a couple days after Citigroup Day when they put their pocket protectors back in -- and I'm laughing at my controller -- but when they got the numbers done, no, it is not anything new.

Second question, in the quarter you were up less than peer in several areas; transaction services, Smith Barney, the private bank. Any reasons for that?

Revenue or earnings?

Revenues.

I actually thought that in GTS we beat at least one of our competitors pretty badly. So we may have to study that a little bit.

Anything unique in the fourth quarter that might have kept say transaction services down?

No, on the earnings we always tend to see a little bit of seasonality in the fourth quarter in terms of the expenses, excuse me. In terms of revenues, the things that tend to drive us are volume activities, things that are going on in the stock markets and so on. So I don't know of anything there that would have impacted our revenue particularly different. We didn't have any business coming in or coming out, for example.

More generally, you met your targets in '06 but you lagged peer. My question is how much does executive compensation get based off of performance versus peer, versus your own internal targets? Because over half of your business is in investment banking which was a record, and emerging markets and non-U.S. which is going great. So how do you guys get paid?

Well, Mike, I think the performance appraisals for everybody in the place, myself included, are based on a composite of a number of things: one of which is our absolute performance. But a clear component of it is our relative performance. Our relative performance on a number of metrics, whether it is revenues or net income, total stockholder return, in some of those we did better than others. And in some we didn't do as well as others. All of that is a factor in how people are judged and how people are paid.

What is the peer group?

Maybe Art can give that to you. We list on our proxy what our peer group is for the executive ranks as a whole but I don't have it right here in the room with me.

All right, thank you.

Mike, while we've got you I just turned to the GTS page, I see a different story than what you are seeing. I see actually as we look at the linked quarters here we had revenues up from 1.5 to 1.94 in the quarter. That was actually an acceleration of what we've seen in the quarter before. I think it also represents an acceleration of the year-over-year growth rate. As I look at Smith Barney likewise, I think we see an acceleration from what was from the second quarter on revenues, 1.994 in the third quarter to 2.2 so I don't see anything. As I eyeball across these numbers I think the numbers actually look okay.

All right, thanks for the clarification.

Your next question comes from Glenn Schorr - UBS.

Sallie, a quick question on reserves. I know credit is awesome, but you do point out the good pickup that you have on the consumer loan side. We haven't seen a change to reserves so the ratio slips lower. I wonder if you could just address that?

Well, we believe that we have adequate reserves, we believe we have the right level of reserve for what we are seeing in terms of the growth in the portfolio, what we see in terms of the embedded losses in the portfolio. As the environment changes the complexion of the portfolio changes, we review that. We have to go along with the guys that have the pocket protectors or the Ph.D. guys who look at the reserves and we feel very good, very good about the level of them.

I can't argue with where credit has been checking out lately.

That is correct; I mean it is funny because as you are saying that I was thinking a year ago, two years ago, three years ago we were sort of folks who were asking the same question. Don't think we are relaxed about credit at all, we are just as neurotic about it as you want us to be and folks are working very hard on credit, particularly in some of these areas where we may see a slight bit of movement in credit, we have teams working on that. But we really feel good about the reserves and we feel good about the credit performance.

Over to the investment bank, I agree with everything, good revenue performance across all the areas you pointed out. Comp and non-comp were a little higher than I thought. I think sequentially for the year it looks reasonably in line with last year, but the 16% uptick in non-comp, I wonder if you could just comment on how much is seasonal versus just really good business trends; your thoughts there?

Yes, a couple of things as I'm doing this, I'm actually looking at page 24 of the supplement. If you look at the comp ratio, Glenn, quarter to quarter to quarter there is volatility in the number and I apologize for that. We do it based on the mix of the businesses, as more businesses, some businesses earn more that had what I would refer to as a lower comp load, the ratio would go down versus a higher comp load. And of course we also in this business, as all of you know, look at the competitive environment. And particularly as you get to the end of the year when you get the information in, look very, very closely at the competitive environment to determine what the right level is. Over time these things, they really come together and this year did as well. So last year for the full year you had a 35.6% compensation and benefit ratio as a percent of net revenues. This year the reported number for the full year is 38.7% but I'm going to remind you that we had the 123 R impact during the course of the year which was almost 3 percentage points, I calculated it as 2.8. When you ex that out you actually had a pretty stable, relatively stable comp to net revenue ratio, the rest of it really being driven by some of the mix issues. So that will change quarter to quarter. But over the course of the year I think it looks all right. In terms of the non-compensation ratio, you are seeing some of the investments that we made in the business there during the course of the year come through on an annual basis. Glenn, in the fourth quarter for a variety of reasons I always ask why this has to be so, but for a variety of reasons we do have fourth quarter uptick. You will see that ratio, it didn't tick up this year but in other quarters you will see it tick ups 2 percentage points, 6 percentage points, I think there is T&E in there that can tick up. The vendors, we asked them and asked them and ask them and ask ourselves to get all those in but in the fourth quarter, those things just tick up for us.

Last one should be quick. I think I asked this last quarter but it's still a head-scratcher. On the balance sheet the investment line has been growing significantly; I think you explained in purchasing mortgage securities. It is just very different than what we see from other banks given the curve environment, so I just wondered if you could address that?

Yes, and in fact I would broaden out the entire balance sheet has grown, really grown pretty significantly; all in good places and are driving good results. But in terms of the investment uptick what we saw there was some mortgage-backed security purchases, we sold some. We sold some in the last quarter and we bought some as well. In the corporate investment bank as I was looking through those numbers we had some increases in the available for sale in both EMEA, Europe, Middle East and Africa and the United States which were part of the rate positioning.

Okay, I have to take it in the context of your comments on the overall NIM and how each business is managed, so that is cool. I appreciate it.

Your next question comes from Mike Holton – T. Rowe Price.

Good morning. I wanted to ask a question about the expense review that Druskin is undergoing right now. Chuck, I think you mentioned that you expect that review to be completed in the first quarter. If that is correct, should we expect that Bobby will be either on the first quarter conference call or maybe hold a call of his own to present those results and talk to investors?

I think that is entirely likely. Yes.

Okay and definitely post the first quarter?

I'm sorry? I said in the first quarter. We are going to be done by the first quarter, by the end of the first quarter.

Okay, thanks.

Your next question comes from Frank Suozzo – Alliance Bernstein. Frank Suozzo – Alliance Bernstein: Just a question on consumer finance and the returns that you expect from the business over time. If you look at the two pieces of the business and obviously Japan you are scaling down. I guess one question is, ultimately you were earning 5% on assets before the change, the gross revenues were 24%, so if you took the gross revenues down to let's say even 18% you would still be earning a healthy return. One question is, why such a substantial reduction given the returns in the business even with the reduction in rates? Secondly, how much of a cut in the business size would you say has to occur in order to accommodate the changes in legislation? Separately on non-Japan business which is actually considerably bigger in loans, that return was something like 44 basis points on assets this past quarter, it has been running well below 1%. The question is, what kind of return on assets do you anticipate or are you planning for in the non-Japan consumer finance franchise? It seems like it should be at least a 3% ROA business.

Let me do Japan. In Japan the issue really is not the simple comparison of the lowered interest rate and even a smaller level business. It is really the runoff of the portfolio over the course of 2007. We have different projections, we picked the one that we think is the most reasonable one. But the portfolio is going to run down; the old, higher yielding portfolio is going to run down. So you have the mix shift between an old book of business and a new book of business coming on which will have a dynamic effect on the returns in that transition year. The other thing that I think is going to be important there going forward is that the business will be, I think, exposed to a different level of competition in Japan as the banks, that is the traditional banks, get more into a business which has not been participated in largely by the traditional banks. It has been more of a separate segment. So I think that you are likely to see very significant competitive pressures on a broad basis and that is what we are really preparing for in terms of as you described it, a very significant cutback.

I would add to that I think there is a lot of work to be done during the course of '07 and '08. You read the estimates out there that some good portion of the customers who are in the gray zone we simply won't, that the industry simply won't make loans to. That they will go into I think it is called the black zone which is I guess the illegal part I guess, or they won't have credit at all. Because with the net credit losses that they imply we simply won't be able to loan to them at the lower rates. Then some portion of the customers will go into the lower rates and some other portion we need to work through. A quarter of them will move to the white zone rates, some maybe a similar portion we won't loan to, and in the other portion we just need to work our way through. We will be taking the pricing down. We have to think about as we think about the transition period, the anti-selection that may occur and that is part of the forecast for us of breakeven. So it really is a matter of shrinking and changing the business. Over time we look for it; you talk about 300 to 350 basis point ROA, we look for it obviously to be zero in the near future. But I think it makes sense to think about the business over time in Japan as being in that kind of profitability range, having come down from quite a bit more attractive. The numbers you say were even higher than that some years ago. In terms of the other businesses outside of Japan it is not, as you know, that they are inherently attractive businesses; we've been investing very heavily in them. Suffice it to say there is nothing in them that keeps us from seeing those as being certainly as attractive as our other consumer finance businesses on a profitability basis and certainly quite a bit more attractive on a growth basis. So overall we feel good about the portfolio, there weren’t a lot of earnings from it because we've been investing and because we've had this headwind from Japan. But over time we believe it is going to be a very attractive and growing part of the company.

Just as a follow-up to that, does what has happened in Japan raise for you any kind of long-term questions about whether in fact you should be in the consumer finance business? Just because you've been expanding it obviously very rapidly, but if you have a market which has a legislated change in a developed market and now you are in risky markets, why couldn't you essentially be mortgaging your future here?

I think it's a very legitimate question. Whenever you have an external event like a significant change in legislation you have to raise a question about that. I don't think that the situation in Japan calls into question our growth in consumer finance around the world. I think that because the situation in Japan was pretty unusual, this notion of gray zone and the difference between a legally enforceable rate and a usury rate that here in the States we don't have that; in most places you don't have that. I also think that in most places around the world we did not have -- and this goes back to the earlier question -- we did not have as much reliance or weighting on this as such a significant part of our consumer business. This was a very large percentage of our consumer business in Japan. We would not want that to be the case. So if you think of it in a more balanced portfolio sense and you think of the difference between enforceable and usury rates as being an anomalous situation in Japan, I don't think that this causes us to revisit the entire notion of consumer trends. In fact, I think that if you look at our competitors most people believe that this is not only a growing segment but a very profitable one and that it is actually subject to quite a bit of competitive pressure.

Let me add to that very briefly. When we project out these businesses and we make the investments, there is no business in the world in financial services where prices are increasing in leaps and bounds, there is always pressure across our businesses. So as we look to put in these branches, we look to make the investment, we take into account that pricing pressure all the time. Whether it is one that we drive -- as we often do in markets where we enter -- we might price a bit more attractively so that with our Citibank name, Citigroup name and the attractive pricing that can be a very attractive proposition for folks. Or because of competitive pressure, legislative pressure. So these things are part and parcel of being in the business, Japan was unique and was a real break in the business.

Your next question comes from Andrew Collins – Piper Jaffray.

On credit quality you mentioned headwinds in the business in '07. I was just wondering if you do that by line of business? And a related question on Mexican cards. Are they easily forecasting into '07 similar to U.S. cards?

On Mexico cards are they easily forecasted -- they are forecastable. I wouldn't want to say which one is more easily forecastable. But we've been in the business for a while, we have the performance in the different vintages. When we move into different markets we test them and let them season for a period of time so we don't go full bore into a market that we've never seen and never known before. So it is a less developed market in the U.S. so maybe the forecasting is a bit more difficult. But overall this is a terrific management team, many of you have seen and know Manuel Medina-Mora and so we feel confident about it. We do look for credit to continue in Mexico in terms that we look for the increase to moderate but we by no means look for it to go down and that's why we had put in the additional loan loss reserves. In terms of forecasting by business I decline to go sub-business by sub-business. Let me just say in the U.S. consumer business we look for the credit to remain good, maybe I characterize it as very good, but for it to be a bit of a headwind for us from the year before. It may be better than we expected because even in these early days and certainly we saw all through last year the bankruptcies continue to come in under our plan by some good measure. So where there's always at this point in the cycle you worry about downside on credit, one place we are seeing is that bankruptcies are better than expected. In the international consumer business, we do look for more of a credit headwind again, as these businesses season. I can tell you as we go country by country there with the exception of the ones we've talked about Mexico, Taiwan, we don't have much of a UK issue but you hear about UK from many of our competitors. The credit in the overseas market actually is very stable on an underlying basis. But we look for a moderate, modest to moderate deterioration in that next year. In the CIB where we've been running credit recovery, of course we look for that to begin to move its way back to more normalized. Now you put all this together and we do have a pretty, from a very favorable environment in '06, a pretty stiff headwind for ourselves in the budget for '07.

An unrelated question. You talked about positive operating leverage by line of business at the Investor Day, you were submitting budgets there and I am just wondering if those budgets were approved? Also if you could give us any kind of sneak peek on some of Bob Druskin's initiatives?

Those budgets were approved and that is what we are working on this year. In terms of Bob's initiatives, as I said on Citigroup Day, we are not looking for him to squeeze the rock a little harder in terms of magazine subscriptions and black cars and so forth. What I'm looking for there are real structural reviews; that is, how many people do we have in headquarters? How many headquarters do we have? We have for example headquarters here in the building in I'm sitting in; we have one downtown in our capital markets and banking business and we have on in Hong Kong, we have one in London, we've got a lot of headquarters around the world. We have a lot of separate, middle and back office businesses. Each of our consumer businesses, mortgages, cards, consumer finance has its own separate middle and back office business. Do we need separate middle and back offices for each of those businesses? Do we have our infrastructure in the right locations? I don't mean only offshoring but also inside the U.S., do we have people in New York that ought to be in San Antonio? Do we have people in the U.S. that ought to be outside the U.S.? That is the kind of structural review that I'm talking about. And so I hope that gives you some sense of what he is focused on.

Your next question comes from John MacDonald – Banc of America.

A quick question on acquisitions. As you said you were busy in the second half of last year with a number of acquisitions announced. If there was another consideration in 2007 for acquisitions, any thoughts of what the cumulative impact of these deals might be on '07 financial results?

The short answer is not that we disclose, John. I think that the level of activity we had in the second half of the year, the fourth quarter especially, is one that is probably above the level that we would expect on an ongoing basis, although it felt very good, I must say. I think that we again are very focused on the organic growth and see the acquisitions as really extending the franchise and adding to our earnings growth, not as the primary driver of it. So we obviously have internal goals but none that I would feel comfortable in disclosing publicly.

John, you are going to remember that we don't do these large dilutive deals. So as we've looked at these deals and we brought them on, these are slightly additive in the first year.

Okay. Quick question for Sallie on the U.S. consumer lending. Any color on the security gains that have been contributing to revenue growth, how much that contributed this quarter? Is there a change in strategies since we've seen it for two quarters now, and maybe that relates to the buildup in securities on the balance sheet?

Yes. John, in terms of in this quarter it was somewhat less than it was in the third quarter, pretty close to I think it was in terms of the total level of the MBS gains, probably about $115 million, so down a bit from the third quarter. I wouldn't describe it as a change in strategy. If the guys from the consumer lending group here were here they would actually talk about the balanced business that they have which has been able to deliver for them very good results through a variety of interest rate environments. So sometimes you are going to find they get more earnings from the gains on sale which hasn't really been the case in this past year, and some from the origination, the MSR. The difference, it really is a pretty balanced business. So this is right now a way in which they have been earning money. But note that the originations remain very good, they have really moved up the lead tables on the consumer side, the rankings, as they have been also taking increasing advantage of the different distribution points they have here at the company.

Going back to an earlier question I think this is an area, there are a number of them, but this is an area where I think pretty fairly people would say that we have outperformed the competition in terms of the financial results.

Last quick question -- that was helpful. Sallie, is 2.5% the starting point for the NIM in '07? I guess until Japan starts contributing profits again, is that fair?

Well, I don't think we need Japan to contribute profits again, we had a loss this quarter and so it really was the charges we took this quarter, not the fact that we need them to start. I never really thought about what the starting point was for next year. I tend to think about it as being this underlying 262, honestly.

Yes, because in the third quarter Japan really didn't contribute a lot of profits so the 262 reflects I think Japan being out.

Yes.

Okay, thank you very much.

Your next question comes from Susan Katzke – Credit Suisse.

Thank you. I want to go back, Chuck, to your comments at the opening about the fourth quarter being the bottom of the drag from opening new branches.

This is in consumer, yes.

Right, is your confidence that it's the bottom of the drag a function of spending less to open new branches or month-to-month improvement in the revenues coming into the branches?

Again, I was talking in the context of international consumer and the answer to your question that it is both. In other words, if you think of almost visually the relationship between piling on investments in a cumulative sense, what we open in the first quarter, in the second, the third and the fourth and then each of those traunches pick up revenues gradually in a layered kind of way, the relationship is a dynamic one. That is, the revenues grow on a trend line versus what you've already put in and that is one set of relationships. But it is also affected by how much you are piling on, on the investment side. So we at expect to moderate in '07 the amount we are putting into one side of the equation, we expect to be right on track for the other side of the equation, and so in some ways it is a beneficial relationship between those two. But it is really the combination of the two.

Let me share on the revenue side, Susan, some numbers with you. If you look at the contribution to revenue growth from the investments to the international consumer revenue -- and I'm going to go first quarter, second quarter and so on of this year -- it was 2.1% in the first quarter, 2.4% in the second quarter, 2.8% in the third quarter and 3.4% in the fourth quarter. So that gives you a feel and, as you know, we track it sort of month-to-month. But quarter-by-quarter you're seeing that build-up. However, because the investments have been high you've actually seen more of a drag to the bottom line, the earnings line through the course of the year. So it's going to be both of those: a continuation of that revenue growth as well as a moderating of the investment side.

Sallie, your comfort in the manageability of losses from the Mexican card business. When I look at the delinquencies, it's down on a stated basis, but if you look at it on a lagged basis, given the growth in the underlying loans, the delinquencies are up pretty materially still. So are you expecting higher than 8% loss rates in that portfolio and that's okay, given the yields?

That's right. Susan, the override of the additional loan loss reserve was to take that into account as we grow the portfolio. So we see what you see, which is the increasing numbers as you lag it. We look for seasonally, we may look for a moderation in that in the first part of the year, but we do have the thing continuing to track at these types of levels.

Just one final question. Last week in the Times it was reported that you're contemplating a rebranding or maybe you've now made the decision to rebrand Citi. Can you speak to the cost of implementing a rebranding, as it seems a pretty material cost when you are speaking so much to expense management as a much more real initiative into 2007?

Susan, a couple things on that. First, we don't have anything to announce on branding today. I would say two things about cost. First, there is a significant cost detriment right now in having multiple advertising programs for multiple businesses that don't reinforce each other. So if we had a common brand we would get some benefit on the cost side just from having a more consistent and integrated advertising effort -- and we spend a lot of money on advertising. The second is that I would be surprised if in the context of what we're talking about now, the environment we're talking about now we would undertake any very significant cost efforts at rebranding.

Okay, good enough. Thank you so much.

Your next question comes from Howard Mason – Sanford Bernstein.

Just a quick question on trading; I wonder Sallie if you could address the growth in trading-related balances which seemed fairly significant on a linked quarter basis, up about 10%? Separately, and I know this is a favor here, perhaps you could give us a bit more granularity on net interest revenue by telling us what the net interest revenue from the trading book was in the quarter?

Let me start, Howard, with the net interest revenue from trading. We've got on page 13 of the deck, what we'd broken out for you is the 479 which is net interest revenue, the increment, the good guy versus the prior year from trading, that is actually trading and alternative investments.

Right, I was hoping to get the trading broken out within that if possible.

Let me see if I got it. We tend to think of it in the same bucket and so we don't typically discriminate between the two of them. Art is going to have to get you that. As I say we tend to think of them not so much as trading but we tend to think of them as being core versus non-core. I don't like to use those words but the combination of the two sort of fall in the same bucket for me. In terms of trading account assets, there is nothing that particularly stands out. There is good growth that we had, a lot in Europe which you've seen has really flowed through to very good European results for us in the corporate investment bank. In fact I would note in Europe we actually earned more again in Europe than we did in any other region of the world, as well as really across the portfolio. I would tell you the stuff doesn't appear to be extraordinarily high risk or extremely high risk, because you take a look at the VAR that we report in the quarter, Howard, which we are finalizing as we speak, it is up a bit from the third quarter as you would expect, up about 10% from third quarter as you would expect, given the better trading results. But it is actually down from last year and for the company overall we look for it to be down about 13% over the prior year. So I would characterize the trading assets, they are not in any particularly riskier areas.

Returning to the balance sheet management in general if you look at the growth in the trading book and combine it with the growth in mortgage securities that we chatted about and the residential first mortgage portfolio, it has had the effect of growing the balance sheet significantly. As a consequence your Tier 1 capital ratio is down about 30 bips year on year. I just wondered how to think about the changing mix in the balance sheet and the consequence of your capital ratios.

I would say the Tier 1 ratio is down for a number of reasons; balance sheet growth is certainly one of them. But clearly as we pay back dividends and we have been buying back shares, that has been also an impact for us. As we think about all this with the Tier 1 ratio we track that, we obviously track the TCRWN ratio which is typically our tighter ratio and we try to keep that above 6.5%. But for all these we take into account with the ratio the balance sheet is rock solid, actually. In fact as you recall we were recently -- on the Citibank side -- upgraded to the highest rating. So while the ratios are down I'd say this as an extremely strong organization from a balance sheet management perspective.

Your next question comes from James Mitchell – Buckingham Research. James Mitchell – Buckingham Research: Hi. Maybe if we could just follow-up a little bit on business as usual expenses. Even if you normalized for the true up on the comp side in the investment bank, total expenses were up 14% sequentially, and revenue was 11%; and even on the non-comp side it was a little higher. Given your talk last quarter about focusing on keeping the growth and business as usual expenses down, I just want to get a sense of how much was seasonal versus just still continued expense growth?

If you are looking at it sequentially, and I apologize I am about to torture you and I really don't want to do that. But the revenues were up, let's call it 11% for the company quarter over quarter. There were a couple of items that impacted that and so I would say it is a low teens percent, maybe 12% or 13% is what I think of it as being. So the 17% quarter over quarter on expenses, a lot of that is going to be that compensation. For the company overall and we talked about the CIB and some of that impact. But for the company overall you are seeing growth in businesses with what we call a higher comp load. CAI for example, almost tripled in size, the CIB up very nicely from the third quarter as well as the U.S. consumer business which has what we call a lower comp load, up a smaller amount versus the third quarter. So you are seeing a mix in there. On top of that, there actually was a little bit of 123 R that was stronger in this quarter than the others as we did the true up for the end of the year. Then beyond that, as you mention there is some seasonality particularly in the consumer businesses with the advertising and marketing, as well as the seasonality I mentioned in non-compensation expenses. As we look at the progression of the quarters on a year-over-year basis, if you cut through -- and I apologize because I know it takes some work – but if you cut through and you look at the trends, the trends are better underlying; the quarter over quarter is not as good but I think pretty attributable to mix than to seasonality. All in all, all that being said, remember you as shareholders, this is what you get, so you can cut through anything you want. The numbers we deliver are the numbers we deliver and we are clearly very focused on this issue and on the expense part of it as we go into '07. James Mitchell – Buckingham Research: No, no, I hear you. Just with the continued focus on business as usual I would expect that when you look at sequentially you normalize for some of the things like FAS and other things and have a little bit more at least incremental margin contribution. So how should we think about business as usual going forward into '07? Is 4Q a decent run rate? How do we factor out seasonality versus sticking expenses?

I want to be careful about, I think we've given you a view as to what we want to have the positive operating leverage and it is certainly in the plan for '07. I want to be careful about taking you through it quarter by quarter. In terms of giving you expense growth types of levels, you know this business as well as we all do which is some portion of it will depend on what revenues are particularly in our more markets-related businesses. But suffice it to say we haven't put in front of our board a plan that has significant negative operating leverage through the course of the year and then we are hoping for a Hail Mary in the fourth quarter. We need to begin performing every day of the year. James Mitchell – Buckingham Research: No, I hear you. Just separately, any comments on investment banking pipelines? Thanks.

Yes, the investment banking pipeline actually remains very, very good and it remains up across M&A, across equities, across high yield if you go back to this time last year. All those up at a very, very good double-digit types of levels. In terms up from September, it is down a bit. The M&A pipeline remains higher than it was in September, equity we had a good equity underwriting quarter. So it has cleared a little bit of that out, but it still remains at very robust levels versus before that. High yield as well, down a bit but still at robust levels as well. So nothing at all to complain about when it comes to those pipeline levels.

Your next question comes from David Hilder – Bear Stearns.

Thanks for your patience with all the questions. If I could go back to Mexico for a second just to get some more detail on what the segment was that caused the higher losses? Whether that is a segment that you or your people on the ground there are actually deciding to cut back? More broadly, are the higher credit losses in that particular segment perhaps a sign that you may be running up against limits to growth in Mexico which has been a great performer for you?

I can take that, maybe Chuck will have something to add. I'd say in Mexico it really is our cards business. You will recall in Mexico we, as well as the industry, really pulled back on the credit that was being provided on the consumer side to Mexico given the crisis of several years ago. Clearly Mexico as a country, the economy has performed very well and is getting through the latest election I think is a real tribute to what that economy and what the government has accomplished getting through it as well as it did. Given all of that, we have retrenched as others have, and given the expertise that we have in our United States cards business with the Precision Sciences and so on, we undertook to take some of that expertise to Mexico and to begin to grow that market. We were at one point very, very conservative in the market; we had good returns and very little growth. Manuel and his team undertook to begin extending credit to more folks in Mexico. But in fact as I understand it, in terms of the country there, while we look at this as you hope we do and ask is the country over leveraged, is the consumer? We are not even to the point where we were several years ago. So it has been a movement into a broader segment of the market and with that has come very good growth, very good profitability but increasing credit. But again we are talking about this a lot, it's not as if this is making a loss by any means, it remains for the quarter a 5%-type of return on asset business so this is a very good business for us. It is helping to extend credit to areas of that population. So pulling back broadly -- absolutely not. As with every cards and lending portfolio we have around the world, we will have sub segments of it that are performing better and worse. So we are constantly tweaking and changing the offerings that we have.

And broadly in Mexico, because you asked a broader question as well, I don't think there is any sense that we feel we are running up against limited growth in Mexico. Manuel and the team have a wide variety of new products and services that really are expanding the historical products there at Banamex and on the corporate side we are doing very well there. As the economy expands we will have real opportunities for growth. So, no, expanding the product set here had certain dynamics but we are not retrenching in that product set and this is not a signal of any limits on growth in Mexico at all.

Thank you. Just one quick follow-up, Sallie. The $900 million swing in accumulated other changes in equity, was that mostly currency or something else?

Actually it wasn't, it was a really very boring underlying quarter in OCI, David, with the exception as you know the pension accounting change this quarter. As you would have read in our 10-Q, we had a $1.7 billion negative to OCI, so a little bit less than what we'd expected at the time of the Q. It was going to be 2.1 at that point but because of good performance and attention on a change in the interest rates that impacted us. But underlying it was actually surprisingly little movement for as we mentioned as large an investment portfolio as we have, for example. A little bit of the good guy on the foreign currency translation during the course of the quarter, but not a dramatic move given the balance we have throughout the world.

Great, thank you.

Thanks, David. Thanks for your patience.

Your final question comes from Joseph Dickerson – Atlantic Equities. Joseph Dickerson – Atlantic Equities : Thank you for taking my question. I just had a quick question on your U.S. card business and how you intend to grow the load there from a product standpoint? It looks like your growth decelerated somewhat whereas the industry and your peers accelerated somewhat. I ask the question on the context of the margin and the U.S. consumer business because it seems to me like one of the headwinds that you will continue to face in '07 is the mix shift towards the mortgage business, which is growing quite handsomely for you.

Well, I would say if you look between the two businesses the overall U.S. consumer business, there certainly has been a shift between the two of those. And while one has higher net interest margin which hurt us all year on our NIMs, the other has lower credit which helped us on credit. I think there was a difficult story to tell on that. Remember they are both very good profitability and very good return businesses for us so we like both of them and are happy in the way we manage them, to have either of them grow nicely because they are good returning businesses for shareholders. In terms of the core of your question the growth in the U.S. cards business, I think there has been a perception out there because the cards business certainly has under grown the competitors on a receivables basis for some period of time. There has been a perception of do these guys know how to grow this? One point I would make that Chuck made is that we did an acquisition a few years ago which was the Sears portfolio, which I think is a bigger part of the portfolio than I think folks have realized in the past, 16%, and it has been shrinking, down 13% over last year. So what we actually had is we had a business that has been growing relatively well, but because the dynamics of this private label portfolio has really been pushed down by that. Now, none of this is going to turn the cards business overnight into a 27% receivables and revenue growth business. We recognize the business is at a later stage of development than some of the others, such as the international cards businesses we are managing, and we manage all of these businesses appropriately for that. So we where does this come to? We have great people in there who run the business well, who have underlying better growth than you can see. Why do we care about that? Because as the Sears portfolio stabilizes, we will be able to see some more of that growth come through and they look to deliver good bottom line results for the company, but they are growing in places like the Premier Path which has been quite successful in some of the travel and affluent areas. In the business cards for example, all these initiatives for them have been going pretty well and we look for those to begin to come through in a clearer way to the bottom line for you. Joseph Dickerson – Atlantic Equities : I'm sorry to ask one more question. How is the American Express relationship working in the U.S. card business?

I think quite well, quite well. This is a net-net positive for us. We keep the customers, we keep the interchange fees, it is really a competition with the other networks, MasterCard and Visa. Our experience so far with the American Express card issuance is quite good.

I would say though it is not something that is yet big enough or big enough growth that you can really see it in the bottom line performance.

Thanks everybody for joining us and to many of our Citigroup colleagues around the world listening to the call, I want to say thank you to the team. Art.

Thanks, Chuck and thank you, operator. Thanks everyone for being on this call. As always give us a call at investor relations if there are any other questions we can help with. That concludes this call.

This concludes Citigroup fourth quarter and full year 2006 earnings review.

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